Developing Countries’ Role in International Tax Cooperation

Developing Countries' Role in International Tax CooperationOver the past year I’ve worked with the secretariat of the Intergovernmental Group of 24* on a paper that discusses how developing countries could engage with a range of international tax cooperation issues. The paper can be downloaded here: Developing countries’ role in international tax cooperation [pdf].

The G-24 plays a caucusing role for its members in the IMF and World Bank, and so tax cooperation is becoming increasingly important for it as those organisations’ profile in tax work increases. There were some interesting presentations at the G-24’s last technical group meeting in February, and its most recent ministerial communique [pdf] includes the following statement, a mix of welcoming current initiatives and noting areas where they are insufficient for emerging markets and developing countries (‘EMDCs’):

We welcome ongoing initiatives on international tax cooperation such as the Automatic Exchange of Information (AEoI) initiative and the Base Erosion and Profit Shifting (BEPS), and call for a framework that ensures effective participation of EMDCs. We support the development of a digital global platform with least compliance cost for implementation of AEoI. We appreciate the work of the UN Tax Committee and encourage multilateral support to upgrade the Committee to an intergovernmental body to enhance the voice of EMDCs on international tax policy matters. We also call for more attention to developing fair tax rules to guide the taxation of multinational corporations and for international cooperation to prevent harmful international tax competition, negative spillovers from shifts in tax policies in major countries, and illicit financial flows.

One of the interesting elements of this project was the diverse positions and interests within an equally diverse group of ‘EMDCs’. Below, for example, is a table showing participation in international tax organisations and institutions. This was such a moving target that we had to set a ‘freeze date’ of 25th May 2017.

G-24 participation in international tax initiatives, May 2017

I hope the report provides a good overview of the state of play and issues involved on that date. Below is the text of the recommendations section, which gives a flavour of the document.

The G-24 has highlighted the importance of effective international tax cooperation to support developing countries’ efforts to mobilise domestic resources, so that they can achieve their development goals.  It could build on this recognition by setting out to develop a pro-active agenda for international tax rule reform that meets the needs of developing countries, and identify different international forums through which to achieve it. G-24 members could work together within existing forums such as the UN tax committee and OECD to put their issues of concern on the agenda. The UN tax committee’s potential has yet to be fully realised by developing countries, and there may also be new opportunities created by enhanced participation in OECD initiatives. G-24 members could strengthen their engagement by enhancing national political oversight of UN and OECD tax work, as well as advocating a stronger, upgraded UN tax committee when the opportunity next arises.

On tax avoidance and evasion, G-24 members could consolidate their participation in multilateral conventions on information exchange and mutual assistance, and could share their knowledge and experiences in this area to build each other’s capacity to benefit from their participation, as well as to identify reforms to international tax standards that might reduce the administrative hurdles to benefit.  Where necessary, this could lead to alternative, but compatible, standards in areas such as transfer pricing and tax treaties that give a greater share of the tax base to developing countries.

As some G-24 countries are capital-exporters to other developing countries, they could take up the IMF and OECD’s recommendation to perform ‘spillover analyses’ of the main aspects of their tax systems that have the potential to adversely affect other developing countries’ tax revenues, whether by encouraging tax competition or increasing incentives for tax avoidance. Also with regard to tax avoidance, G-24 members could share experiences across regional economic groupings such as ASEAN and MERCOSUR to advocate codes of conduct on tax competition, as well as working through ECOSOC for the adoption of the UN tax committee’s proposed code of conduct on exchange of tax information.

Above all, the G-24 provides a political platform for forging common views on international development issues among developing countries, in which tax coordination is a main concern.  It is able to work with the OECD within its inclusive framework, and a number of G-24 members are now participating in many of its initiatives. It can also support the efforts of the UN and other forums in which developing countries can more actively engage so that they can benefit more effectively from international tax rule reforms and cooperation.  A sustainable approach to international tax cooperation in the long term requires international institutions that reflect the increasingly diverse needs of countries with an interest in international tax standards.

*Just as there are 19 countries in the G-20, and 134 countries in the G-77, there are now 26-and-a-half countries in the G-24. The ‘half’ is China, which has the status of ‘special invitee’.

The Panama papers and the OECD: re-reading Havens in a Storm

Last week I re-read Jason Sharman’s classic Havens in a Storm, described by Tax Analysts’ Martin Sullivan as “one of the best books out there for tax experts trying to make sense of big countries’ policies toward tax havens” (Sullivan’s review includes a length summary of the book). I was looking for a hook for this blog and, well, it was provided by Jürgen Mossack and Ramón Fonseca.

The OECD has published a curious Q&A on the Panama papers leak, according to which the problem is “Panama’s consistent failure to fully adhere to and comply with international standards”, which it contrasts with “almost all international financial centres including Bermuda, the Cayman Islands, Hong Kong, Jersey, Singapore, and Switzerland.” But the Panama papers story isn’t just about Panama, it’s about the other financial centres that were used by Mossack Fonseca (see the chart below), most of which are rated as “largely compliant” by the Global Forum, the OECD satellite body that peer reviews information exchange compliance.


Arguably the OECD have a point: the Mossack papers show how the world was before the G20 got involved and these jurisdictions reformed, in which case there’s been a lot of unnecessary hot air on British TV news over the last few days. There is certainly some evidence on the ICIJ’s data page to support this view:

Mossack Fonseca’s clients have been rapidly deactivating companies since 2009, records show. The number of incorporations of offshore entities has been in decline for the past four years.

But the main groundswell of opinion, as anticipated by Rasmus Christensen (Fair Skat), is that it’s time to use some serious economic and (in the UK’s case) legal power to overturn haven secrecy. That’s Global Witness’s position. France has wasted no time in restoring Panama to its tax haven blacklist. According to Richard Brooks, with his typically powerful prose:

To tackle the cancer of corruption at the heart of the global financial system, tax havens need not just to reform but to end. Companies, trusts and other structures constituted in this shadow world must be refused access to the real one, so they can no longer steal money and wash it back in. No bank accounts, no property ownership, no access to legal systems.

Turn the clock to 1998…

Havens in a Storm gives us some important context about why we are where we are. The OECD’s Harmful Tax Competition project has come to be seen as the defining international political tax project of a generation of global tax actors – both OECD bureaucrats and governments – in the way that BEPS is for the current generation.  The initial 1998 report [pdf] is still a reference point, primarily for its classic definition of ‘tax haven’, and the list of ‘uncooperative tax havens’ published in 2000 has not ceased to be cited, even though the last jurisdictions were removed from it in a 2009 update.

The four characteristics of the OECD’s 1998 tax haven definition
1. No or only nominal taxes
2. Lack of effective exchange of information
3. Lack of transparency (i.e., bank secrecy)
4. No requirement that activities booked there for tax have economic substance

Yet the 1998 and 2000 reports are also anachronisms. They raised the spectre of sanctions against countries meeting the tax haven definition, but within a few years, the project had been dramatically scaled back and watered down. The initial threat of specific sanctions against jurisdictions that did not commit to comply by 31st July 2001 became a partnership approach accompanied by what Sullivan refers to as “a series of toothless pronouncements, a mixture of cheerleading and scorekeeping.” Furthermore, the OECD’s ambitious original aim of dealing with harmful competition for mobile capital was abandoned for a focus exclusively on the exchange of tax information on request.

According to Sharman, these failures came about because the OECD lost a battle of ideas and language, not an economic (or, for that matter, military) one. Central to this analysis is that “the technocratic identity of the OECD as an international organisation comprised of ‘apolitical’ experts” resulted in a battle waged in a rhetorical and normative space, rather than a political one dominated by the calculus of economic power. “The OECD made the struggle with tax havens a rhetorical contest, that is, one centred on the public use of language to achieve political ends.” The OECD is able to do this not because of the economic dominance of its members, but because of the secretariat’s use of “expert authority” to create influential regulative norms. The power of ‘blacklisting’ tax havens lies not in the economic might behind the implied threat of sanctions, but in the very act of labelling, with its reputational consequences (“the bark is the bite”).

Opponents forced the OECD to abandon key planks of the project by turning its rhetorical weapons against it. First, they portrayed the idea of sanctions as a contravention of the principle of fiscal sovereignty, suggesting that by its implied advocacy of sanctions, the OECD secretariat was breaching norms of reasonable conduct. Second, they turned the term ‘harmful tax competition’ back on the OECD, forcing it to defend its pro-tax competition stance and eventually to replace the term with ‘harmful tax practices’. Third, they alleged hypocrisy among OECD countries, pointing to Luxembourg and Switzerland’s (and later Belgium and Austria’s) refusal to be bound by the project’s outcomes. In the world of rhetorical power, such ‘rhetorical entrapment’ is a powerful tool..

If the project had been primarily a manifestation of raw state power, these rhetorical skirmishes would have mattered little to the eventual outcome. Yet Sharman makes a powerful case that they were its main determinants. One important example is that he attributes the decisive intervention of the Bush administration not to its being ’captured’ by multinational businesses with material interests in the project being scaled back, but to the ideologically-driven machinations of lobbyists from the Center for Freedom and Prosperity.

So what does it mean that, in 2016, language continues to be the OECD’s main weapon? As its Q&A on the Panama papers makes clear:

As part of its ongoing fight against opacity in the financial sector, the OECD will continue monitoring Panama’s commitment to and application of international standards, and continue reporting to the international community on the issue.

On one hand, the OECD’s normative claims are more powerful because of its claim to be the custodian of ‘international standards’, a claim that probably has more weight as a result of the increasing involvement of some non-OECD countries in its various tax projects. On the other hand, the peer review approach seems to implicitly concede a conservative notion of procedural fairness (reasonable behaviour, again) towards secrecy jurisdictions.

And the allegations of hypocrisy among its members don’t help its authority: the US’ ambivalence [pdf] towards sharing tax information automatically on a reciprocal basis is the standout example; there is talk about the use of US states as tax havens by Mossack Fonseca; the list of non-compliant jurisdictions that marked the G20’s entry into tax information exchange in 2009 gave Hong Kong and Macao special treatment.   This is perhaps also one sense in which the UK’s actions towards its overseas territories could have some bearing on how Panama behaves.

…now turn the clock forward to 2013

To finish, the parallels between the Harmful Tax Competition project and the Base Erosion and Profit-Shifting (BEPS) project on multinational corporate taxation are worth pointing out. Consider: an initial ground-breaking report from the OECD secretariat that has become an intellectual reference point, a whittling away of that initial ambition in intergovernmental negotiations, and an inevitable feeling after the fact that the policy reforms agreed won’t quite fix the problem so eloquently framed by the OECD in the first place. It would be too soon, of course, to judge how successful BEPS has been in comparison to its predecessor.

But it’s more interesting, I think, to look at the rhetorical battle. In inventing a new term, ‘Base Erosion and Profit Shifting’, the OECD succeeded in owning the construction of the problem just as it did by defining ‘tax haven’. ‘BEPS’ refers simultaneously to a set of corporate practices that, because they are brought under this umbrella, are hard to define, but it also refers to the OECD’s own project to tackle them. In using the term, critics and supporters alike endorse the OECD’s intellectual leadership. The rapid and widespread adoption of the term illustrates that in 2013, just as in 1998, the OECD knew how to operate in a rhetorical battlefield.

The hypocrisy concern applies here too: for example, several OECD and EU members are in trouble for providing selective tax advantages to multinationals. It’s quite noticeable that, from the start, the OECD secretariat has tried to neutralise this problem by tackling it head on. For example, its tax chief, Pascal Saint-Amans, told the Financial Times in 2012:

The aggressive tax planning of the last 20 years was achieved with the complicity of governments themselves to cope with tax competition

An interesting research question is whether Sharman’s analysis of why the Harmful Tax Competition project struggled can still explain developments in its successor, the Global Forum, or indeed the outcomes of the BEPS project. Do OECD tax projects always stand and fall on the secretariat’s skill at owning the rhetorical space, or do we need to acknowledge governments’ material interests and incentives to fully explain outcomes? (In their commentary on the Panama papers, Len Seabrooke and Duncan Wigan, political scientists who believe in the causal role of ideas, seem to emphasise the latter, how “big, powerful states…themselves may benefit from sheltering other countries’ hot money.”) Answering that question might help us resolve a second, prescriptive one: can the problem of offshore tax avoidance and evasion ever be fully addressed on the technical, normative and rhetorical terrain occupied by the OECD, or does it require an institution with a more political modus operandi? This is certainly an interesting time to be studying the politics of international tax!

From theory to practice: development finance institutions and Global Forum peer reviews

There are two big ‘policy coherence’ issues when it comes to taxation and the way that development assistance works. The first is the way donors often demand tax exemptions for aid-funded projects. If you think about how aid can be quite a large share of GDP in some low-income countries, these are large sums at stake, so I’m pleased that this is back on the agenda of the UN tax committee.

The second area is the way that development finance institutions (DFIs), which use aid money to invest in private sector projects, often make investments that are structured through tax havens. While DFIs vocally defend this practice, NGOs have been complaining about it for a while, arguing that such structuring is often aggressive tax avoidance, and that it builds, rather than reduces, the role of offshore jurisdictions with respect to developing countries. But NGOs’ position has always been weakened by the absence of an authoritative ‘blacklist’ of jurisdictions to be avoided.

That changed last week with the publication of the OECD Global Forum on Transparency and Exchange of Information’s long awaited peer review results.Here we have a list of four jurisdictions (The British Virgin Islands, Cyprus, Luxembourg and the Seychelles) that are officially ‘non-compliant’ with OECD standards, and two more (Austria and Turkey) that are only ‘partially compliant’.

This put me in mind of a Guardian article earlier this year in which Luxembourg was one of the six offshore jurisdictions through which Britain’s DFI, the Commonwealth Development Corporation, makes its investments. According to that article, “DfID said it will ensure CDC only invests via jurisdictions deemed to have substantially implemented tax standards, according to the OECD global forum on tax and transparency.”

So, what does Luxembourg’s ‘blacklisting’ mean for CDC? Will it cease to invest through Luxembourg? And what of its “new long-term financial commitment” through this country?

A more detailed policy is that of the World Bank’s International Finance Corporation [doc], which states:

IFC will not submit to the Board for approval any new IFC Investment in any IFC Investee Company organized in an Intermediate Jurisdiction, or controlled by an entity organized in an Intermediate Jurisdiction, that has not met international norms for tax transparency by reference to the published results of the Peer Review Process. An Intermediate Jurisdiction will be deemed not to have met international norms for tax transparency if, subject to paragraph 9 below:(i) a Phase 1 review has been completed and, based on a report publicly issued as part of the Peer Review Process, the Phase 2 review is deferred because the jurisdiction does not have in place crucial elements for achieving full and effective exchange of information; or

(ii) a Phase 2 review has been completed and, based on a report publicly issued as part of the Peer Review Process, the overall assessment of the jurisdiction is “partially compliant” or “non-compliant;”

The outcomes of the policy are summarised in the following table:

Summary of the IFC's tax transparency policy

Summary of the IFC’s tax transparency policy

So it seems to me that investments made through those six jurisdictions that were labelled partially or non-compliant in their phase 2 reviews are now off the cards for the IFC. But it also looks from the policy wording like the 14 jurisdictions that did not progress to phase 2 (Botswana, Brunei, Dominica, Guatemala, Lebanon, Liberia, Marshall Islands, Nauru, Niue, Panama, Switzerland, Trinidad and Tobago, the United Arab Emirates and Vanuatu) should also be excluded.

There is some language about how these outcomes can be ‘rebutted’, “if the World Bank Group is satisfied that the jurisdiction is making meaningful progress.” So it will again be interesting to see how the IFC’s policy, which up until now has been largely a theoretical exercise, holds up in practice.

Postscript: If we wind back to the OECD’s classic 1998 definition of tax havens, information exchange is neither a necessary nor sufficient criterion: the core criterion is low tax rates, and then other things such as economic substance requirements and tax treaty networks, as well as information exchange, come into it as secondary criteria. So we can’t say that, by not using these jurisdictions, a DFI would definitely not be engaged in aggressive tax planning or supporting the ‘tax haven’ industry. We don’t have a list for that. But this is a start at least!

Why the US and Argentina have no Tax Information Exchange Agreement

AFIP offices

The HQ of Argentina’s tax authority, AFIP (Photo credit: blmurch)

In this new era of automatic information exchange between tax authorities, the United States has come to be seen as the driving force behind the end of tax secrecy. (Although I note that back in 2010 Tax Justice Network said that the US’ FATCA initiative “preserves the essential Tax Haven USA approach – preventing the US
having to provide information to foreign governments about their own fatcats using the USA as a secrecy jurisdiction. What it does is to beef up the ability of the U.S. to find out about its own tax cheats.”)

I’ve been looking through the US embassy cables made public by Wikileaks, and one of the most interesting tax stories relates to the US and Argentina.

In March 2007, Argentina made a request for a tax information exchange agreement (TIEA) with the US. A cable explains how the US responded by offering a full tax treaty, not a TIEA:

Following AFIP’s March 2007 TIEA information request, EconCouns contacted U.S. Treasury Tax Treaty officer Henri Louise [sic] who provided background on USG BITT protocols and models as well as on the USG’s 2007 negotiation of a TIEA with Brazil. At the request of AFIP Tax Director Castagnola, EconCouns then presented copies of the 1998 U.S./Venezuela BITT and the 2006 model tax treaty. Also at AFIP’s request, EconCouns met on this issue with the Ministry of Economy’s Undersecretary for Public Revenue Mario Presa, whose office develops broad GoA tax policy guidelines. On August 27, the GoA’s Ministry of Economy Washington rep Jorge Heilpern and Washington Embassy DCM Jose Gabolindo met with Treasury Tax Treaty officers Kissel and Louise for exploratory discussions on the potential to negotiate a Bilateral Income Tax Treaty (BITT).

This is akin to saying “you can have tax information exchange, so long as you surrender some of your taxing rights through a double tax treaty.” Argentina clearly didn’t want to do so, and later that year the cables record two discussions between the head of Argentina’s tax and customs authority, Alberto Abad, and the US Ambassador to Argentina. The second discussion, in November, is recorded as follows:

Abad recalled that the U.S. Treasury Department continues to condition a formal US/GoA Tax Information Exchange Agreement (TIEA) on negotiation of a broader Bilateral Income Tax Treaty, notwithstanding the fact that the U.S. in 2007 signed a TIEA with Argentina’s Mercosur partner Brazil based only on the promise of future tax treaty negotiations… AFIP sees the U.S. IRS as a model to be emulated and seeks a closer working relationship. The only solution to the globalization of tax evasion, money laundering and terror finance, Abad concluded, is increased exchange of information by tax and revenue authorities. “Give us a signal,” he concluded. “We don’t need to negotiate a big bilateral agreement, but we want to develop a new, closer relationship with you.”

(Elsewhere, the cables record an almost comical level of frustration that the US has been unable to obtain a tax treaty with Brazil. One is headed “small victory in the 40-year struggle for a BTT”.)
The continued absence of a TIEA between Argentina and the US suggests that both sides held firm on their positions (and in the meantime Argentina has cancelled a few of its other tax treaties). So any time the US gets on its high horse about the fight against tax avoidance, it is worth remembering that it is using Argentina’s need for information on its taxpayers’ foreign income to hold that country to ransom for a tax treaty.

Some heretical thoughts on automatic information exchange and developing countries

Information exchange agreements are one of the main tools open to governments in the fight against tax evasion. They allow tax authorities to investigate tax(non-)payers’ affairs across borders, uncovering unreported income and piecing together tax planning structures. They’re also the main focus of coercive efforts by big economic players to “crack down on tax havens.”

As in many areas of international economic policy, what developing countries need isn’t the same as what developed countries do. So while tax justice campaigners are celebrating the G20’s weekend declaration on information exchange, I’m a little more sceptical about what it will mean for tax and development. This post is also by way of a comment on Owen Barder and Alex Cobham’s proposed G8 initiative on tax transparency.

Quick background

Information exchange comes in three flavours:

  • On request, the current lowest common denominator in agreements, where one country’s tax authority must fill in a form for each taxpayer about whom it wants information, setting out and justifying its demand from another country.
  • Spontaneous, where tax authorities pass on information of interest to another that they uncover in the process of an investigation.
  • Automatic, touted by campaigners as the gold standard, under which information is transmitted in bulk between authorities. This has the advantage that a tax authority will find out about a taxpayers’ undeclared overseas income without needing to suspect its existence beforehand.

Taxpayer confidentiality means that countries can’t usually do any of this without the legal authority of a treaty. Treaties can come in two forms:

  • Bilateral, either as part of a double tax treaty or as a standalone tax information exchange agreement
  • Multilateral, of which there are several examples including an EU Directive and the Multilateral Convention discussed below.

G20: what’s going on

So, to the G20. Saturday’s Finance Ministers’ communiqué [doc] says:

we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress. We welcome progress made towards automatic exchange of information which is expected to be the standard and urge all jurisdictions to move towards exchanging information automatically with their treaty partners, as appropriate.

This latter sentence is a gradual strengthening of language, from this in November 2011 [doc]:

We welcome the commitment made by all of us to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and strongly encourage other jurisdictions to join this Convention. In this context, we will consider exchanging information automatically on a voluntary basis as appropriate and as provided for in the convention

Via this in June 2012 [doc]:

We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance.

I’m not sure of the difference between “call on” and “strongly encourage” in diplomatic language, but these evolving declarations suggest a couple of trends in the G20’s coercive agenda. First, automatic information exchange is moving from something voluntarily towards becoming “the standard.” Second, the OECD is now going to be reporting back to the G20 on who has joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an OECD/Council of Europe collaboration that is now open to all comers. (I wrote a sceptical post about the Multilateral Convention when I was at ActionAid, and while I won’t recap the points I made there, I was never reassured about the convention’s governance.)

It seems, then, that a direction of travel has been mapped out towards an international standard in which jurisdictions exchange information automatically through the Multilateral Convention, monitored by the OECD and under pressure from the G20. This is quite consistent with Alex and Owen’s proposal, under which automatic exchange among the G8, their dependencies and overseas territories, would be “the foundation of a global system for automatic exchange of tax information between all countries who wish to participate in it.”

Coercion and developing countries

We can be sure that the G20 pressure is targeted at tax havens, not developing countries. Note that Alex and Owen, above, emphasise countries “who wish to participate in it.” In practice, however, many developing countries will inevitably be caught up in the momentum. They are already participants in some of the key international instruments. For example, in sub-Saharan Africa, where tax administrative capacity is weakest:

So what’s the risk? I’m worried that, if they adopt the automatic information exchange standard any time soon, overstretched revenue authorities in developing countries will have to undergo a massive reprioritisation of effort towards putting in place systems to enable them to supply information automatically. This when they already struggle to find the capacity for, for example, transfer pricing audits. It’s hard to imagine them finding the resources to both comply with the demands placed on them by automatic exchange, and to make use of the data they receive automatically. (The same concern, at a lower level, might apply to developing countries’ existing commitments to information exchange on request: what’s the compliance burden placed on a developing country by the requests it receives from treaty partners, and by the Global Forum’s peer review process?). Alex and Owen have this covered when they suggest that:

The authorities of developing countries will be able to access the information shared by our tax authorities from the outset, even if their own tax authorities are not yet themselves in a position to share information automatically.

I’ve also heard people argue that automatic information exchange might be the kind of motivator that tax authorities and governments in developing countries need to push them to get serious about tackling tax evasion, given that many of its biggest exponents are influential members of elites. Well, that’s possible. But wouldn’t it make more sense to abandon talk of information exchange with developing countries and focus on information transfer? That way they’d have all the information without such a large compliance burden. And an asymmetrical arrangement is easily justified from a development perspective.

Source-based information exchange?

Aside from the compliance burden, another question is the basis on which information is exchanged. Automatic exchange is designed to benefit the country in which a taxpaying individual or company is resident, since the information flows to there from the other countries in which she earns her income. This is also the basis of Alex and Owen’s proposal. It would certainly be useful for developing countries in the context of tax haven abuse by their individuals and medium-sized domestic companies, but it is of no use to them in investigating the tax affairs of foreign investors. Maybe that’s not the brief, but Alex and Owen’s proposal does say:

We attach particular priority to ensuring that developing countries are able to access and use this information to enable them to collect taxes which are legally due from companies and individuals within their jurisdiction.

This got me thinking. What would an automatic information exchange system designed to support source-based taxation of multinationals look like? There is at least one piece of information that could flow in the opposite direction, from residence to source country.

Consider Tax Authority A investigating Company A, and Tax Authority B investigating Company B. Company A sells widgets to Company B. Under existing automatic exchange standards, no information would be exchanged, unless Company A was owned by Company B, or vice versa. Alex and Owen’s proposal extends this, as follows:

all participating authorities will collect data from financial institutions and companies about income, gains, and property paid to non-resident individuals, corporations, and trusts, which they will provide automatically to the jurisdiction in which that individual or company is resident.

Under this version, Tax Authority B would transfer information to Tax Authority A about the payment made by Company B to Company A for the widgets. It’s an improvement, because at the moment companies often force tax authorities to jump through legal hoops to obtain this information via treaty requests. That’s because even if Companies A and B are part of the same multinational, they are separate companies, and Tax Authority A can’t ask Company A for Company B’s financial information.

The one complication is that neither tax authority in this scenario would necessarily know whether Company A and Company B were related parties. Sometimes tax authorities in developing countries struggle to prove that an overseas party with which the company under audit is transacting is a related party at all, especially if their tax law defines related party in a way that is hard to prove.

This information would in fact be available to Tax Authority C in the multinational’s parent country, which should (or at least could) have a list of all parent Company C’s subsidiaries overseas. Source-based information exchange, limited to the case of multinational companies, would complement residence-based exchange. It would involve the tax authority in the country of the parent transferring information it gains through auditing the parent on to tax authorities in the countries where the multinational works.